Data as of September 30, 2022, unless otherwise noted.
Performance (total returns)
| Benchmarks | September 2022 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | -4.32% | -14.61% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | -4.02% | -14.62% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | -2.27% | -3.25% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit markets declined in September: Markets were gripped with volatility once again in September. Stubbornly high inflation, hawkish Fed rhetoric and poor earnings results in certain economic bellwether stocks weighed on markets with little reprieve. Equities suffered their worst monthly decline of the year, down -9.21%, while high yield bonds ended the month down -4.02% and senior secured loans lost -2.27%. Credit continues to trade in response to dueling concerns over rising interest rates and slowing economic growth. In a sign that recession fears returned to the fore, the highest rated high yield bonds outperformed lower rated CCCs last month. In the loan market, the outperformance of BB rated loans over B rated loans was the largest since March 2020, as investors favored quality in this market as well. Still, concerns over interest rates remain, as evidenced by the relative outperformance of floating rate loans over fixed rate bonds. The 10-year U.S. Treasury yield rose for much of the month, briefly eclipsing 4% in intraday trading, before ending September at 3.83%. This weighed on the duration-sensitive Bloomberg Aggregate Bond Index, which lost -4.32%, its worst month of the year. The pace of credit market issuance remained anemic, with just $9 billion of high yield bonds and $8.4 billion of loans issued last month. On a year-over-year basis, high yield bond issuance is down 82% compared to the same period in 2021, while loan issuance is 69% lower. High yield bond fund outflows accelerated in September. Retail investors pulled nearly $7 billion from the asset class, bringing year-to-date outflows to roughly $42 billion. The loan market also saw steady outflows, the fifth consecutive month that the asset class has lost retail dollars.
Credit fundamentals remain supportive: With the path of economic growth top of mind, credit investors appear focused on the fundamentals underpinning the market. The release of Q2 data showed that, once again, fundamentals remained remarkably resilient. Revenue and EBITDA grew by double digits in both high yield bond and senior secured loan markets and margins improved. Leverage in both markets has returned to pre-COVID levels and sits below historical averages while interest coverage statistics have hit record highs. While the asset class tends to trade alongside broader risk sentiment, which may mean more volatility ahead, the solid fundamental backdrop gives us comfort around the medium- to long-term outlook for the asset class.
Key takeaways
- Credit markets declined last month as volatility roiled financial markets. High yield declined -4.02%. Floating rate senior secured loans lost -2.27%.
- Rising long-term interest rates pressured the duration sensitive Bloomberg Agg, which fell -4.32%, its worst monthly decline this year.
- Despite negative returns are the headline level, credit fundamentals continue to improve.
